Introduction
Background
Share repurchase programs have gained significant traction in the past year, largely attributed to evolving governance practices According to Andriosopoulos and Lasfer (2015), the announcement of share repurchases in Europe surged to 47.2 billion euros, highlighting the growing trend and importance of these programs in corporate finance.
1997 compared with 14.2 billion Euro in 1996 Previous researchers show that there are 1159 events of announcement repurchase from 1989 to 1997 in Canada (Ikenberry et al 2000)
264 events of buyback from 1985 to 1998 in British (Rau and Vermaelen 2002) Hatakeda and Isagawa (2004) sought that 452 events from 1995 to 1998 in Japan and 800 events from
Between 1993 and 1997, share repurchases in Hong Kong were primarily executed through open market transactions Research by Brav et al (2005) indicates that share repurchases have become a more significant method of returning capital to shareholders compared to previous years Additionally, Barclay and Smith (1988) suggested that stock repurchase is a crucial financial strategy for firms in developed nations.
As the economy recovers, share buyback programs are gaining popularity among companies and investors When companies have excess cash, they can choose to save it, invest in new assets, acquire other businesses, pay off debt, issue special stock, or buy back their shares on the open market A stock buyback program, also known as a share repurchase program, involves a company purchasing its own shares from current shareholders, signaling that it believes its shares are undervalued and providing a way to return money to shareholders According to Stephens and Weisbach (1998), there are three main methods for firms to repurchase shares: tender-offer repurchases, Dutch auction repurchases, and open-market repurchases.
In 1999, it was established that open market repurchases boost a firm's stock price by enhancing its return on equity and earnings per share, making it the most recognized method for share buybacks The stock market tends to respond favorably to repurchase announcements, with numerous studies indicating that firms experience positive abnormal returns upon such announcements, irrespective of the time frame Zhang (2005) further corroborated these findings.
Research indicates that FCU e-Theses & Dissertations (2018) report a buy-and-hold abnormal return exceeding 20% when compared to a control portfolio matched by size and book-to-market ratios Chan et al (2004) found that firms announcing share repurchases enjoy an average yearly return of 26.2% post-announcement Additionally, there is a notable increase in the stock price of repurchased shares within the following year, suggesting that the market's response to buyback announcements is initially slow Overall, the long-term performance of stocks involved in repurchases remains positive.
Firms often engage in stock repurchase plans as a strategic method to reinvest excess cash back into the business According to Dittmar (2000), one key reason for stock buybacks is the Excess Capital Hypothesis, which allows companies to distribute capital flexibly without the commitment associated with dividends Another important factor is the Undervaluation Hypothesis, where firms may repurchase shares when they believe their stock is undervalued, signaling confidence to the market and potentially acquiring mispriced shares Additionally, stock buybacks offer tax advantages for shareholders, as they can decide when to realize gains, unlike dividends which incur immediate taxes (Voss 2012) Overall, firms may pursue buybacks for various motives, including addressing undervaluation, incentivizing management, and efficiently managing excess capital (Dittmar 2000; Voss 2012).
1.1.2 Share repurchase announcement in Taiwan
Share repurchases have a rich history in the United States, with research dating back to the early 1980s Numerous studies have examined the US stock market, while others have explored share repurchase motives in regions like Canada and Europe, revealing a strong empirical link between share repurchases and stock returns, as well as positive outcomes following repurchase announcements In Taiwan, share repurchases are governed by corporate laws outlined in Articles 158, 163, and 167.
In response to the Asian financial crisis of 1997 and the Internet Bubble burst in 2000, Taiwan's Legislative Yuan enacted Article 28-2 of the Securities and Exchange Act in July 2000, allowing corporations to repurchase their outstanding shares for strategic purposes This regulatory change led to approximately 25% of firms listed on the Taiwan Stock Exchange (TWSE) and the Over-the-Counter (OTC) market announcing share repurchase programs within just five months Companies can now utilize share repurchases for various objectives, including employee share transfers, equity conversion, and enhancing their credit and shareholders' equity.
Since August 2000, listed companies in Taiwan have been allowed to repurchase their shares, with regulations permitting this for specific purposes such as providing incentives, converting bonds to shares, and protecting company credibility and equity These regulations enable companies to make repurchase announcements without any mandatory buy-back obligations.
A company must announce its decision to repurchase its own shares within two days of the board of directors' resolution, whether the repurchase occurs at a centralized securities exchange or through a securities firm The announcement should be reported to the Securities and Futures Commission (SFC) and must include key details such as the purpose of the repurchase, the type of shares involved, the maximum monetary amount allocated for the repurchase, and the planned timeframe along with the number of shares intended for repurchase.
(5) price range of the share to be repurchased, (6) method for the repurchase and (7) number of shares held at the time of reporting and so on
Within two months after the reporting period for the planned repurchase expires, the company can amend the originally stated purpose of the repurchase This requires a majority vote at a board meeting with at least a two-thirds quorum, followed by filing a report with the Securities and Futures Commission.
Research Problem
Companies can manage capital through various methods, including stock distributions, stock buybacks, corporate bonds, and seasoned equity offerings (SEO) While all these strategies involve distributing cash to shareholders, they have distinct impacts on financial ratios and shareholder returns Additionally, these capital adjustment methods may communicate important information to the market.
To raise equity capital, firms often issue shares; however, without growth opportunities, retaining unused equity can unnecessarily dilute ownership A practical solution is to buy back outstanding shares, which can help pay off investors and lower capital costs Stocks may be undervalued for various reasons, allowing companies to repurchase shares at a lower price and reissue them later to boost equity capital without additional share issuance The influx of investors can inflate stock valuations and enhance the price-to-earnings ratio Share repurchases serve as an alternative method for returning cash to investors, as companies buy back shares from stockholders, reducing public shares and increasing ownership stakes for remaining shareholders This can lead to short-term price increases due to improved earnings per share, although long-term benefits may vary Research by Hackethal and Zdantchouk (2006) indicates that the frequency of German buybacks is higher in bear markets compared to bull markets, with initial buyback effects on prices being significantly stronger than later effects The primary objective of this research is to analyze the market-wide impact of share repurchase announcements.
Stocks represent a portion of a company's earnings distributed to shareholders, as determined by the board of directors, and can be issued as cash, additional shares, or other assets The value of these stocks is deducted from the company's retained earnings, regardless of the form of distribution According to Miller and Modigliani's irrelevance theory (1961), under ideal market conditions—such as efficiency and the absence of taxes or agency costs—stocks do not influence a firm's value Consequently, stock dividend distribution is a critical financial decision for corporate managers (Bhattacharya, 1979) Firms should consider paying dividends if they lack investment opportunities that would yield higher returns than shareholders' expectations (Adefila et al., 2004; Jagannathan et al.).
Stock repurchases and stock issuance are utilized differently by various firms, with repurchases being pro-cyclical and stock increases occurring steadily over time Firms tend to repurchase stock after poor market performance and increase stock issuance following good performance According to Dittmar (2000), if repurchases and stock issuance are substitutes, regulatory changes could lead to a decrease in repurchase volume post-implementation Additionally, there is a negative relationship between stock repurchases and a firm's stock payout ratio This paper aims to examine the impact of announced share repurchases in relation to stock dividend distributions from the previous year.
Seasoned Equity Offerings (SEO) can indicate that a firm is overvalued, while share repurchases often suggest undervaluation Research shows that SEOs typically occur during periods of high stock market valuations, whereas share repurchases are more frequent in low valuation environments This behavior implies that managers may strategically time their corporate finance decisions, opting for SEOs when stock prices are inflated and repurchases when they are depressed Consequently, managers should reduce their company stock holdings in years with SEOs and increase them during share repurchase years The net purchase distribution shifts left during SEOs, remains unchanged during cash acquisitions, and shifts right during share repurchases This paper examines the differences in firm behavior between announcing repurchases and conducting SEOs.
Companies often seek to raise funds through bonds to support capital budgeting while avoiding earnings dilution However, the announcement of new bond issues can negatively impact stock prices This phenomenon can be explained by several hypotheses, including price-pressure, wealth redistribution, and information release, which suggest varying reactions in share prices following bond announcements (Kalay and Shimrat, 1987) Additionally, Hotchkiss and Ronen (2002) noted that in less efficient bond markets, stock prices may quickly reflect information about the underlying asset's value, indicating that stock returns can have predictive power for future bond returns.
This study explores the relationship between share-repurchase firms and their corporate bond issues from the previous year, highlighting that the informational efficiency of these bonds closely mirrors that of the underlying stocks.
Research Object
This study explores the effects of share-repurchase announcements on subsequent corporate actions, an area often overlooked in prior research that mainly focused on the immediate announcement effects Unlike previous studies, this paper highlights the importance of examining firms' follow-up behaviors, including seasonal offerings and corporate bond issuances, in relation to share repurchases The objective is to analyze how these consecutive announcements influence overall corporate strategy and market reactions.
The structure of the paper
This research paper is structured into five key sections: the introduction, a review of relevant literature, the research methodology, the empirical findings, and a conclusion that outlines the study's implications.
Literature Review
Share Repurchases Motivations
Firms engage in share repurchase programs for various strategic reasons, primarily to return cash to shareholders and signal positive company performance Key motivations include the signaling hypothesis and undervaluation hypothesis, which suggest that buybacks can indicate a firm's confidence in its value (Ikenberry et al 1995; Baker et al 2003) Additionally, the free cash flow hypothesis (Stephens and Weisbach 1998) and preferential tax hypothesis highlight the financial benefits of repurchases Dittmar (2000) identified five main reasons for stock buybacks: the excess capital hypothesis, suggesting firms repurchase shares when they have surplus cash; the undervaluation hypothesis, which aligns buybacks with investment policies; the optimal leverage ratio hypothesis, connecting repurchases to capital structure; the management incentive hypothesis, linking buybacks to compensation policies; and the takeover deterrence hypothesis, where repurchases serve as a defense against potential takeovers.
The FCU e-Theses & Dissertations (2018) analyzed the Tobit model for each sample year using cross-sectional data from firms listed on Compustat and the Center for Research in Security Prices Dittmar noted that firms often repurchase stock when undervalued, as well as to distribute excess capital, enhance net leverage, deter takeover attempts, and mitigate the dilution effects of stock options Notably, stock repurchases frequently occur during peak merger periods to fend off takeovers While the primary motive for repurchasing remains the exploitation of undervaluation, firms may also act based on various other significant motives These motives include the signaling hypothesis, free cash flow hypothesis, capital structure hypothesis, stock substitution hypothesis, and tax efficiency hypothesis, indicating that firms may repurchase shares for one or multiple reasons.
The signaling hypothesis suggests that information asymmetries exist between management and shareholders, with managers possessing more knowledge about the company's value When managers perceive that their stock is undervalued, they may opt to repurchase shares, signaling to less informed investors their disagreement with the current market price and their expectations for future performance This action is rooted in the belief that the firm's stock is mispriced due to the information gap between insiders and outsiders Consequently, when a company announces a share repurchase, the market often reacts positively, correcting the perceived undervaluation of the stock.
Firms are not obligated to execute share repurchases even after making an announcement (Rau and Vermaelen, 2002) Research by Chan et al (2004) indicates that companies assess earnings changes before deciding on repurchases Additionally, their findings reveal a negative correlation between abnormal returns on announcement dates and those occurring after the announcement.
Free cash flow hypothesis is a possible explanation for share repurchase According to
Wu (2012) the repurchases stock uses management ownership to measure the severity of firms’ agency problem The findings suggest that firms with a less severe agency problem
FCU e-Theses & Dissertations (2018) indicate that companies tend to provide more information in repurchase announcements, buy back fewer shares, and generally perform better post-repurchase programs This practice allows firms to distribute excess cash flow to shareholders, thereby mitigating managerial power Research by Stephens and Weisbach (1998) highlights a positive correlation between excess cash flow and share repurchase activity, suggesting that higher excess cash flow leads to larger repurchase quantities However, Grullon and Ikenberry (2000) challenge the free cash flow hypothesis, revealing that firms which refrain from repurchasing shares after announcements often achieve higher excess returns compared to those that proceed with share repurchases.
Companies often engage in share repurchase to optimize their capital structure and mitigate the potential dilution caused by employee stock option plans According to Grullon and Ikenberry (2000), share repurchase is a widely favored strategy for firms aiming to adjust their capital structure effectively.
Research indicates that when companies allocate capital, they tend to decrease equity and increase their leverage ratio However, Dann (1981) argues that initiating a share repurchase program may not be the most effective strategy for achieving an optimal leverage ratio; instead, issuing new debt could be a more advantageous option for firms.
The stock substitution hypothesis and tax efficiency hypothesis work together, suggesting that share repurchases serve as a flexible alternative to stock payouts Voss (2012) highlights the advantages of share repurchases, which are influenced by the tax preference, type of shareholder, and financial flexibility hypotheses, despite their limitations in fully explaining the phenomenon Additionally, Zhang (2005) discovered a negative correlation between stock cuts and firm value, indicating that share repurchase programs do not carry the same risks.
The tax efficiency hypothesis suggests that companies may favor share repurchases over dividends when the tax burden on stocks exceeds that on capital gains, as ordinary income tax applies to stocks while capital gains tax is only incurred on the profit from selling repurchased shares This strategy allows investors to defer tax payments on capital gains, enhancing their financial benefits Research by Bagwell and Shoven (1989) supports this notion, indicating that firms often opt for share repurchases as a means to provide tax advantages to their shareholders.
Effect of share repurchases
According to McNally and Smith (2007), companies often use limit orders when repurchasing shares, indicating that these firms aim to enhance liquidity and mitigate sell-side pressure, ultimately supporting stock prices during declines.
FCU e-Theses & Dissertations (2018) and Smith (2007) found that, on average, share repurchases for TSX listed firms account for 12.25 percent of total trading volume during the repurchase program period
Stock repurchase reduces the public share count in a company, leading to an increase in ownership percentage for remaining shareholders In the short term, stock prices may rise due to the immediate boost in earnings per share from buybacks Research by Wang et al (2013) shows that the short-term cumulative abnormal returns (CAR) for repurchasing firms are modest, with a 4-day CAR of 1.9142% and a 5-day CAR of 2.7086%, indicating a small initial market reaction If management buys back shares due to undervaluation, it often anticipates a larger price increase Over the long term, buybacks yield average abnormal returns of 38.82% relative to the market index and 44.30% compared to the market model over three years, suggesting a positive long-term price performance as the market adjusts slowly.
A study conducted in 2005 examined share price performance before and after actual share repurchases, utilizing data from 135 firms with 3,628 daily repurchases on the Stock Exchange of Hong Kong between September 1993 and August 1997 The analysis focused on short-term performance, using 250 days of return data, and revealed that firms typically repurchased shares when their stock underperformed the market, showing a cumulative abnormal return (CAR) of -1.84% in the days leading up to the repurchase Following the announcement, the average CAR for the three-day event period was 0.43%, indicating a positive market response to the repurchases, with a 21-day return CAR of 0.69% In the long-term analysis, the study assessed the detection of long-run abnormal stock returns using various benchmarks, finding that buy-and-hold returns over three years post-repurchase events were superior, particularly for managers of value firms, who could deliver enhanced performance to long-term shareholders.
FCU e-Theses & Dissertations (2018) abnormal return, which is measured against a portfolio of control firms that are matched by size and book-to-market value ratios, is over 20%
Grullon and Michaely (2004) highlight the significant role of earnings-per-share (EPS) in influencing companies' share repurchase decisions During share repurchases, a company's EPS typically rises because the reduction in earnings from lower interest income is outweighed by a proportionate decrease in the number of shares Conversely, in seasoned equity offerings, particularly when shares are used for employee compensation instead of corporate investments, the impact on EPS is generally negative This negative effect on EPS makes companies more inclined to opt for share repurchases to meet employee stock option obligations rather than pursuing seasoned equity offerings.
Maxwell and Stephens (2003) established a connection between share repurchases and wealth transfer between a firm's equity holders and debtholders, highlighting wealth expropriation reflected in stock prices and bond market reactions Their research revealed that, on average, bond returns decrease by 18.5 basis points at a 1% significance level around the time of a repurchase announcement, and bond ratings are more likely to be downgraded than upgraded following such announcements.
This study examines the impact of share repurchase announcements on a series of subsequent events in Taiwan's market Additionally, it analyzes the behavior of firms before and after these announcements, providing a comparative perspective on their actions surrounding the event.
Data and Methodology
Data
This research constructs a dataset of share repurchases in Taiwan, focusing on consecutive events from 2000 to 2016, utilizing the TEJ database for announcements related to share repurchase intentions, stock distributions, SEO, and bond issuances The dataset is further enriched with isolated announcements from the TWSE classification index, while the TSE Taiex serves as the local market index for the Taiwanese stock market To ensure robust event study and regression analysis, selected companies must have sufficient data, requiring share prices to be available from 250 to 10 business days prior to the event date.
This table describes the summary statistics for announcements repurchases, stock distribution, SEO and Bonds during 2000-2016 for Taiwan
As a result, there are 2588 companies take part in TEJ from 2000 to 2016 into having
The analysis reveals a total of 2,858 share repurchase events, alongside 610 seasoned equity offerings (SEOs), 4,835 stock events, 809 corporate bonds, and 629 convertible bonds Notably, firms that announce SEOs at time t and subsequently engage in repurchases within the following year account for 105 events Additionally, 299 events involve firms issuing bonds at time t and repurchasing in the next year, which includes 92 corporate bond events and 207 convertible bond events Furthermore, there are 555 events where firms distribute stock dividends at time t before repurchasing in the subsequent year.
Event study
This thesis explores the impact of open market repurchase announcements on stock prices, focusing on the motivations behind firms' decisions to buy back shares and the resulting fluctuations in abnormal stock returns in Taiwan around the announcement day The primary objective is to assess the short-term price effects of these share repurchase programs Utilizing event study methodology, the research analyzes stock price behavior on the announcement day and examines trends in the periods surrounding the event.
An event study is a statistical method used to evaluate the impact of a specific event on a firm's value by comparing expected returns without the event to actual returns caused by it The primary aim of these studies is to identify the information effect and the factors influencing changes in firm value on the event date According to Campbell et al (1997), a typical event study begins with defining the event and establishing an event window, which outlines the event's specifics and the timeframe during which share prices are expected to be affected Short-term price impacts, particularly around announcements like share buyback programs, are analyzed to understand share price behavior on the event day and identify any emerging trends Returns are indexed according to the event window dates, with the event date marked as t, coinciding with the announcement of the open market repurchase.
An event study primarily analyzes stock price changes for firms experiencing a common event, as highlighted by Kothari and Warner (2007) This analysis utilizes stock market data to illustrate the unanticipated impact of events on shareholder wealth, measured through abnormal returns (AR), which are calculated by subtracting expected returns from realized returns While the mean AR around the event is often the focus, other factors such as changes in return variance and trading volume are also considered The fundamental steps in conducting an event study include defining the event of interest and its date, as well as establishing the event window for examining its effects.
FCU e-Theses & Dissertations (2018) window (the period during which the parameters of the expected return model are estimated)
To conduct a thorough analysis, first, select sample firms while excluding those affected by confounding variables or external events Next, calculate the Abnormal Returns (ARs) and Cumulative Abnormal Returns (CARs), ensuring to consider non-stock market performance measures for both pre- and post-event periods, potentially adjusting for other relevant factors Following this, aggregate the ARs either cross-sectionally or over time Finally, assess the statistical significance of the aggregated ARs to validate the findings.
Methodology
To evaluate the market response to the share repurchase announcement, I utilize the Market Index Adjustment model and the GRACH Risk Adjustment model to calculate abnormal returns The event study timeline is illustrated in Figure 1, with an event window set from day -10 to day 10 For the GRACH model, the estimation window extends from day -250 to day 0.
The Market Index Adjustment Model
The market model is used to estimate the coefficients The market adjusted model assumes that alpha is set equal to zero and beta to one De Jong et al (2011)
The market adjusting model is described as follows a single factor market model: it it mt
In financial analysis, the return of a firm's stock on a specific day is represented as Rit, where 'i' denotes the firm and 't' indicates the time The market return is denoted as Rmt, and the model incorporates a constant ( i) and a firm-specific beta ( i) The error term ( it) is a random variable with an expected value of zero and a finite variance, applicable for days ranging from t = -10 to t = 10.
In the Market Adjusted Model, the observed return of the reference market on day t
Rmt is subtracted from the return Rit of the observation i on day t
(Estimation Window) (Event Window) (Post-Event Window)
Pre-announcement window Prost-announcement window
The Generalized autoregressive heteroscedasticity (GARCH) model
The GARCH Risk Adjustment model effectively captures the variance of daily stock returns, indicating that significant shocks to share prices, which lead to extreme abnormal returns, result in increased variance on subsequent days This variance gradually reverts to its long-run average, as highlighted by Bollerslev (1986).
In the GARCH risk adjustment model with a single factor market model with GARCH (-10,10) errors is estimated, namely: it i i mt it
The conditional variance may be written as:
(5) with t 2 is the event to returns on day t of event i, the intercept, and
In the GARCH model, the most recent squared stock return, denoted as \( t \), influences the variance of returns, represented by \( \sigma_t^2 \), from the previous day Parameters are estimated using maximum likelihood, employing a non-linear solver for optimization Notably, a significant shock to returns will increase the variance of returns on the subsequent day.
Abnormal returns are essential for evaluating the impact of specific events, as they help isolate the event's effects from overall market fluctuations Specifically, the abnormal return for a firm on a given event date is calculated by subtracting the expected return—assuming the event did not occur—from the actual realized return.
The expected return is influenced by a specific information set rather than being tied to a particular event Various models of normal return exist, shaped by the definition of the information set and its functional form, which are thoroughly examined in the subsequent section.
To calculate the cumulative abnormal returns (CAR), one must summarize the abnormal returns within the designated event window for each announcement CAR represents the total of these abnormal returns across the specified event periods.
Time periods are used to investigate the timing effect of share repurchase and it spans from -10 to 10 day surrounding the event date which is the short term
This chapter analyzes daily share prices of companies listed on TEJ that have announced share repurchases Utilizing event study methodology and descriptive statistics, the analysis assesses the impact of buy-back announcements on share prices The event study methodology identifies positive or negative abnormal returns by examining an event window that encompasses several days before and after the announcement date.
Whole market impact of announcement repurchases
The thesis investigates the impact of open announcement stock repurchases on companies listed on the Taiwan Stock Exchange (TSE), utilizing daily share price data from 2000 to 2016 This section highlights the short-term price effects of share repurchase transactions, with Table 2 illustrating the abnormal share price performance surrounding the event day for the complete sample.
The analysis of Average Returns (ARs) and Cumulative Average Returns (CARs) using the Market Index Adjustment model reveals significant trends surrounding the announcement of share repurchases within the event window of [-10, 10] Prior to the announcement, ARs exhibited a gradual decline, reaching their lowest point on the announcement day.
2 is -0.517 ARs was the increase from the day -1 and increased dramatically hitting a peak is 1.8115 in the day +1 After ARs was decreasing but was positive
The empirical results show that the entire sample yields a significant negative CARs on the following periods day -1 to day 0 This means that stock price is clearly undervalued
The analysis reveals a significant increase in Cumulative Abnormal Returns (CARs) on days +1 and +2 following stock repurchase announcements, indicating a positive market reaction Prior to the announcement, CARs were negative from days -10 to -1, hitting a low of -3.2553 on day -1 On the announcement day, CARs showed a slight improvement from -3.4279 to -3.2533 Post-announcement, CARs experienced a notable surge, jumping from -3.2533 on the announcement day to -1.4418 on day +1.
Figure 2 and Table 3 demonstrate the Average Returns (ARs) and Cumulative Average Returns (CARs) related to the repurchase announcement of the GRACH Risk Adjustment Model during the event window of [-10,10] The ARs showed a negative trend from 10 days prior to the announcement until the day before it, with a slight decrease on the announcement day (from -0.3417 to 0.2363) Following the announcement, ARs peaked on day +1, increasing significantly from 0.2363 to 1.8927 After day +1, ARs stabilized around 0.2.
The Risk Adjustment model exhibited fluctuations in Cumulative Abnormal Returns (CARs) similar to those of the Market Index model Prior to the announcement day, CARs experienced a decline, reaching a low of -2.9174 on day -1 However, there was a notable surge on day +1, with CARs rising from -2.6812 to -0.7885 By day +3, CARs showed a positive and gradual increase.
The analysis reveals that both models experienced fluctuations in cumulative abnormal returns (CARs), with the lowest mark occurring on day -1 and peaking on day +1 Notably, the Market Index Adjustment model showed insignificant CARs two days post-announcement, whereas the GARCH Risk Adjustment model exhibited a slight increase in CARs.
Table 2 ARs and CARs around announcement repurchase analysis by the Market Index Adjustment Model
I use standard event day methodology base on the Market Index Adjustment model The market Index in the TSE Taiex Event window is [-10,10] with the sample consists of
Statistics of sign test method
Statistics of sign test method (accumulation)
Figure 1 AR and CAR of repurchase announcement of The Market Index
Figure 2 ARs and CARs of repurchase announcement of The GARCH Risk
Table 3 ARs and CARs around announcement repurchase analysis by the GARCH Risk Adjustment Model
I use standard event day methodology base on the GARCH Risk Adjustment model The market Index in the TSE Taiex Event window is [-10,10], the estimation is
[-250, 10] and day 0 is the announcement date, with the sample consists of 2588 events from 2000 to 2016
Statistics of generalized sign test method(p = 0.474)
Statistics of generalized sign test method (accumulation)
After I analyzed the fluctuation of the full sample, I focused on three periods to analyze In table 4 represents the ARs and CARs around repurchase transactions
In Table 4, the average returns (ARs) from -10 to -1 days were negative, but significant positive ARs were observed following share repurchase announcements, with the highest ARs occurring on day 1 across both models (2.3861, 1.8661, 1.3709) and (2.4518, 1.9024, 1.4912) This indicates a notable market signal effect, peaking on day 1 However, ARs on day 0 during the financial crisis (2007-2009) were negative (-0.1528 and -0.1033), contrasting with the positive ARs recorded in the periods 2000-2006 (0.2908, 0.3907) and 2010-2016 (0.2434 and 0.2582), suggesting an information delay during the financial crisis.
In Figures 3 and 4, the analysis reveals that cumulative abnormal returns (CARs) were predominantly negative prior to share repurchase announcements, shifting to positive post-announcement, indicating a significant signal effect across two periods (2000-2006 and 2010-2016) However, during the financial crisis, CARs following the announcements remained negative, despite an increase in value, with the Market Index Adjustment model showing a change from -5.1848 to 0.7817 and the GARCH Risk Adjustment model from -4.8597 to 0.0236, highlighting a severe undervaluation, particularly during the crisis.
The financial crisis revealed a significant undervaluation in the market, which became more pronounced during the crisis itself Post-crisis, this undervaluation gradually diminished Utilizing the GARCH Risk Adjustment model, it was observed that cumulative abnormal returns (CARs) shifted from negative to positive within ten days following share repurchase announcements These findings indicate that the Taiwan market exhibits a tendency to under-react to such announcements.
This figure represents CARs of Market Index Adjustment model from day -10 to day +10 around share repurchase transactions of periods (2000-2006, 2007-2009, 2010-2016) Figure 3 Events window CARs of Market Index Adjustment model
This figure represents CARs of GARCH Risk Adjustment model from day -10 to 10 around share repurchase transactions of period (2000-2006, 2007-2009, 2010-2016)
Figure 4 Event window CARs of the GARCH Risk Adjustment Model
Table 4 ARs and CARs around repurchase transactions
This study employs a standard event study methodology utilizing the Market Index Adjustment Model and the GARCH Risk Adjustment Model, with the TSE Taiex serving as the market index The estimation period spans from 250 days to 10 days before the announcement, with day 0 designated as the announcement date The analysis encompasses a sample of 2,588 share repurchase transactions conducted over this timeframe.
2000 to 2016 I separate observations into three time periods: (1) 2000-2006, (2) 2007-2009, (3) 2010-2016
Model 1 Model 2 Model 1 Model 2 Model 1 Model 2
The consecutive effects of the event
4.2.1 The effect the repurchases with a prior SEO announcement
The analysis of the event study results regarding the impact of additional equity offers on the entire market begins with an examination of Figure 5 and Table 5, which illustrate the development of abnormal returns (ARs) surrounding the SEO announcement day for the entire sample The red line indicates the ARs derived from the GARCH Risk Adjustment model, while the blue line represents the ARs from the market adjustment model These graphs provide an initial overview of the AR movements over the 20 trading-day period surrounding the announcement, offering insights into the effects that the announcement has on the various ARs.
For firms issuing additional equity, the analysis of abnormal returns (ARs) over a 21-day window around the announcement date reveals significant insights On the announcement day (day 0), the adjusted closing stock price shows a notable shift from -0.1862% at day -1 to 0.0692% at day 0, indicating a negative impact on security prices following SEO announcements Furthermore, the data presented in Figure 5 and Table 5 suggest that there are no significant mean or median ARs across the five reported multi-day windows for the period of 2000.
In 2016, the analysis reveals that the lowest abnormal returns (AR) typically occur on the announcement date, while positive ARs are observed from four to two days prior to the announcement Specifically, the Market Index Adjustment model shows significant mean and median ARs of 0.0983%, 0.1693%, and 0.153% on the fourth, third, and second days before the announcement, respectively Conversely, the GARCH Risk Adjustment model reports ARs of 0.0246%, 0.0815%, and 0.2143% during the same period Following the announcement, average daily ARs become increasingly negative, with mean ARs of 0.0692% on the announcement day and -0.3162% the following day under the Market Index Adjustment model, and 0.0132% and -0.3279% with the GARCH model Additionally, significant positive mean ARs are noted five days post-announcement, peaking at 0.0986% at eight days, while the GARCH model indicates a decline of -0.0267% on day seven Overall, these findings highlight the significant negative daily average ARs associated with seasoned equity offerings in Taiwan.
Based on Figure 6 and Table 5, CARs during the event period (20 days prior and after the event date) decline gradually for the period of 2000-2016 The CARs found on
The analysis reveals that significant positive abnormal returns are observed in the pre-event period, with the Market Index Adjustment model showing an increase from -0.0395% at six days before the event to 0.6378% two days prior, while the GARCH Risk Adjustment model indicates a shift from -0.3279% to 0.0762% in the same timeframe The highest cumulative abnormal returns (CARs) occur two days before the announcements, followed by a substantial decline post-announcement Specifically, the Market Index Adjustment model's CAR stabilizes around -0.1% until day +10, whereas the GARCH Risk Adjustment model sharply decreases to -1.7067% by day +10 This evidence suggests that additional equity offerings negatively impact stock prices on average, with a more pronounced adverse reaction during the trading days immediately surrounding the announcements.
Statistics of sign test method
Statistics of sign test method (accumulation)
Table 5 Development of the AR and CAR around the SEO announcement of Market Index Adjustment
The table illustrates ARs of the firms around the SEO announcement of 610 events in the window [-10, 10] of Market Index Adjustment Model from 2000 to 2016
This figure represents ARs of two models from day -10 to day +10 around the SEO announcement from 2000 to 2016
Figure 5 Development of the ARs around the SEO announcement
The figure represents ARs of two models from day -10 to +10 around the SEO announcement from 2000 -2016
Figure 6 Development of the CARs around the SEO announcement
Market adjustment model (%) GARCH adjustment model (%)
Market adjustment model (%) GARCH adjustment model (%)
Statistics of generalized sign test method (p = 0.467)
Statistics of generalized sign test method (accumulation)
Table 6 Development of the ARs and CARs around the SEO announcement of GARCH Risk Adjustment Model
The table illustrates AR and CARs of the firms around the SEO announcement of 610 events in the window [-10, 10] of the GARCH Risk Adjustment Model from 2000 to 2016
4.2.1.2 The effects of repurchase announcement with a prior SEO event
This section, I used two models to the analysis: Market Index Adjustment model and GARCH Risk Adjustment model
The Market Index Adjustment model
Figure 7 and Table 7 illustrate the Cumulative Abnormal Returns (CARs) and Abnormal Returns (ARs) related to the Market Index Adjustment during the announcement of SEO at time t and its subsequent repurchase the following year The solid line represents the ARs for repurchase, while the dashed line depicts the CARs These graphs provide an initial insight into the fluctuations of ARs and CARs over the 21 days surrounding the announcement.
In a study of firms that announce share repurchases, the average abnormal returns (AR) exhibit a notable trend, starting at approximately -0.1 on day -10 and peaking on day -3, mirroring the behavior observed during SEO announcements Prior to the announcement, AR reaches its lowest point at -1.0607 on day -4, then increases to 0.9471 by day -3 before declining to -1.0358 on day -1 During the event window of [-1,1], AR experiences a significant increase, with a jump from -0.8842 on day -1 to 0.2231 on the announcement day, ultimately reaching a peak of 1.8188 on day 1.
The analysis of cumulative abnormal returns (CAR) for firms that engage in repurchase programs following seasoned equity offerings (SEO) reveals a significant decline, with mean CAR values dropping from -0.1008 to -6.7036 Observations indicate that share prices tend to decline prior to repurchase announcements, suggesting that managers may strategically time repurchases after experiencing negative price trends The market reaction to the announcement shows a notable CAR of -4.6617 on day +1 and -4.0297 on day +2, indicating a statistically significant but economically small positive response However, the CAR for the period (+2, +10) post-announcement remains insignificant, implying that while the market reacts to the SEO announcement followed by repurchases, the overall impact is not substantial.
Statistics of sign test method
Cross-sectional statistics (accumulation) Prob Value
Statistics of sign test method (accumulation)
Table 7 ARs and CARs of the repurchase announcement with a prior SEO event of the Market Index Adjustment Model
The table illustrates ARs and CARs of the firms who SEO announcement and then repurchase announcement next year of 610 observations in the window [-10, 10]
This figure represents ARs and CARs of the Market Index adjustment on the period days -10 to 10 from 2000- 2016
Figure 7 ARs and CARs of the repurchase announcement with a prior SEO event
The GARCH Risk Adjustment model
The Table 8 shows that AR and CAR for both consecutive in event window [-10,
10] Before the announcement repurchase, ARs was a gradual decrease in event window [-
8, -1] with the sink to a trough in the day -2 (-0.8388) and then a substantial increase in event window [-1, 1] The highest of 2.0023 at the day +1 After the 2-day announcement, ARs plummeted
The analysis of the Figure 8 reveals a significant undervaluation, as indicated by the cumulative abnormal returns (CAR) following the announcement of a seasoned equity offering (SEO) During the event window of [-10,10], CARs were predominantly negative, with a sharp decline from -0.1284 on day -9 to a low of -5.1784 on day -1 Although CARs showed a slight increase on day 0, the change was statistically insignificant compared to day -1, where CARs were recorded at -4.3977 Following the announcement, CARs exhibited a sequential increase, peaking at -1.1919 on day 9, reflecting the market's reaction to the repurchase announcement.
In sum, these results suggest that Taiwan market is weak-reacting efficient to SEO announcement while significant reaction efficient to open-market repurchase announcement
This figure represents ARs and CARs of the GARCH Risk Adjustment model on the period days -
Figure 8 ARs and CARs of the repurchase announcement with a prior SEO event
Table 8 ARs and CARs of the repurchase announcement with a prior SEO event of the GARCH Risk Adjustment Model
The table illustrates ARs and CARs of the firms who SEO announcement and then repurchase announcement next year of 610 observations in the window [-10, 10] and estimation period [-250,10]
Statistics of generalized sign test method (p = 0.472)
Statistics of generalized sign test method (accumulation)
4.2.2 The effects of repurchase announcement with a prior Bond issuing
This section analyzes the dataset by categorizing it into two distinct groups to examine the differences in announcement effects between bond issuing and repurchase announcements The first group compares corporate bond issuing with repurchase announcements, while the second group contrasts convertible bond announcements with repurchase announcements In total, this analysis encompasses 299 events, comprising 92 events related to corporate bonds and 207 events pertaining to convertible bonds.
The analysis of bond issuance announcements from 2000 to 2016 reveals the Average Returns (ARs) and Cumulative Abnormal Returns (CARs) within a [-10, 10] event window, as detailed in Table 9 It is important to note that some firms lacked stock price observations for certain events, which affected the results derived from the two models used in the study.
Table 9 and Figure 9 illustrate that the abnormal returns (ARs) of corporate bonds from both models exhibited fluctuations prior to the announcement of issuance Notably, the lowest ARs were recorded at seven days before the announcement, with values of -0.201 and -0.3502 for the two models On the day of issuance, the trends continued to evolve.
The analysis of abnormal returns (ARs) for corporate bonds reveals a decrease on the day following the issuance (-0.0028, -0.0597), with significant fluctuations observed post-issuance Cumulative abnormal returns (CARs) from two models exhibit contrasting trends; prior to issuance, the event window [-10, -7] shows a sharp decline, reaching a low of -0.1793 with the Market Adjustment model and -0.3502 with the GARCH Risk Adjustment model on day 7 Notably, the Market Index Adjustment model indicates an increase in ARs starting from day -3, continuing to rise after the issuance date Conversely, the GARCH model shows a downward trend in CARs following the announcement, culminating in a decrease by day +7 Overall, these findings suggest that the market generally responds negatively to corporate bond announcements.
The announcement of convertible bonds leads to a negative market reaction, as evidenced by the negative abnormal returns (ARs) and cumulative abnormal returns (CARs) shown in Table 9 and Figure 10 Prior to the issuance date, the ARs for both models exhibited oscillating trends Following the announcement, the Market Adjustment model saw ARs increase from -0.077 on day -1 to -0.0129, while the GARCH Risk Adjustment model demonstrated a consistent decline in ARs over the subsequent two days.
The negative average reaction indicated by the CARs in Table 9 and Figure 10 suggests a downward trend; however, due to the absence of statistical significance, no definitive conclusions about systematic effects can be drawn.
This figure represents CARs of the Corporate Bond issuing base on two Models on the period days -
Figure 9 CARs around Corporate Bond issuing
This figure represents CARs of the Convertible Bond issuing base on two Models on the period days
Figure 10 CARs around Convertible Bond issuing
CAR of Market Adjustment model(%) CAR of GARCH Risk Adjustment model(%)
CAR of Market Adjustment model(%)CAR of GARCH Risk Adjustment model(%)
Table 9 ARs and CARs around Bond issuing
This study employs a standard event day methodology based on two models, focusing on the TSE Taiex market index The event window is set at [-10, 10], with an estimation period of [-250, 10], where day 0 corresponds to the bond issuing date The analysis includes a sample of 1,438 events spanning from 2000 to 2016.
CAR (%) AR (%) CAR (%) AR (%) CAR(%) AR(%) CAR(%)
4.2.2.2 The effects of repurchase announcement with a prior Bond issuing
The Market Index Adjustments Model